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IASB Meeting — 20 and 22 February 2018

Overview

Tuesday 20 February

Disclosure Initiative

The Board will discuss the detailed feedback received on the Disclosure Initiative—Principles of Disclosure Discussion Paper. There are 12 papers for this session, plus a cover note.

Primary Financial Statements

The Staff are responding to the Board’s request in January to clarify what is meant by a ‘key performance measure’ and a measure that is ‘specified or defined in IFRS Standards’. The staff are also recommending that when a management performance measure (MPM) is reported an adjusted EPS that is calculated consistently with the MPM must be presented, together with supporting disclosures. Finally, the staff are also recommending that, within the investing section of the statement of cash flows, a distinction be made between cash flows arising from integral and non-integral associates and joint ventures.

Thursday 22 February

Dynamic Risk Management

In this paper, the Staff set out the qualifying criteria for designating an item into the asset profile, which defines which items are managed for interest rate risk and are therefore subject to performance assessment under the DRM model. They also discuss some technicalities about designation and situations requiring de-designation, as well as documentation requirements.

Business Combinations under Common Control

The Staff are recommending that the Board use the acquisition method in IFRS 3 as the starting point in developing proposals for accounting for business combinations for which all of the parties to the combination are under common control.

Research

The Staff will give the Board a status update on its research programme. The Staff are recommending that the Board start work in the next few months on variable and contingent consideration; provisions; extractive activities; pension benefits that depend on asset returns; and SMEs that are subsidiaries. Work on equity method; pollutant pricing mechanisms; high inflation (the scope of IAS 29); and post-implementation reviews of IFRS 10-12; and IFRS 5 should commence in 2019 or early 2020.

Insurance

The staff will give the Board a summary of the first Insurance Contracts TRG meeting.

Analysis of due process documents

This Staff have set out for the Board the different purposes of Discussion Papers (DP) and Exposure Drafts (ED). This session is being held in anticipation of the Board’s decisions about whether it should publish a DP or an ED for the projects on primary financial statements, goodwill and impairment as well as rate-regulated activities.

Rate regulated Activities

The staff are recommending that the model being developed specify the unit of account as the individual timing differences (as opposed to the net of all timing differences) arising from the regulatory agreement. The staff also explain why they consider that rate-regulated rights and obligations meet the revised definitions of assets and a liabilities in the forthcoming Conceptual Framework.

Agenda for the meeting

Tuesday 20 February 2018

Disclosure initiative: Principles of disclosures

Summary of feedback received

Primary financial statements

Clarifying requirements for management performance measures (MPMs)

Management-defined adjusted earnings per share (EPS)

Presentation of the cash flows of 'integral' and 'non-integral' associates and joint ventures

Related Topics

Related Discussions

The Board will discuss the detailed feedback received on the Disclosure Initiative — Principles of Disclosure Discussion Paper (PoD DP) in this session. The Staff provided the Board with a high-level overview of the feedback received in its December 2017 meeting.

Background

The Board will discuss the detailed feedback received on the Disclosure Initiative—Principles of Disclosure Discussion Paper (PoD DP) in this session. The Staff provided the Board with a high-level overview of the feedback received in its December 2017 meeting. The papers for this meeting are as follows:

Feedback from users of financial statements

11A: Summary of investor outreach activities

11B: Feedback from users of financial statements

Feedback from stakeholders other than users

11C: Cover paper

11D: Overall project approach and scope

11E to 11L: summary of feedback received by each section of the DP

As most of the feedback from users was obtained from outreach activities conducted by the Staff and various Board members rather than through comment letters, their comments have been presented separately from those raised by the other stakeholder groups.

The Board will not be asked to make any decisions at this meeting.

Next steps

The Staff plan to present their recommendations about the next steps of the project in the March 2018 Board meeting.

Feedback from users of financial statements – Agenda Paper 11B

Overview of feedback received from users

1. The disclosure problem

Most users found the lack of relevant information in financial statements to be the biggest problem, followed by ineffective communication. They generally preferred more disclosure and granularity and were less concerned about disclosure overload. Some users also highlighted the importance of making proper materiality judgements when deciding what to disclose and how best to communicate that information.

2. Principles of effective communication

Most users agreed with the principles expressed in the DP; however, they had mixed views about whether the Board should develop mandatory requirements based on these principles. While some users thought that mandatory principles would increase transparency and comparability, others questioned the auditability of the principles and their potential to limit innovative forms of communication.

Many users agreed that including IFRS information outside the financial statements could be useful if they are properly cross-referenced. Nevertheless, some users were concerned about the lack of cohesiveness, perceived lower level of assurance and the on-going availability of information if too much cross-referencing is used. They believed that IFRS information should be presented outside the financial statements only in limited circumstances and that it should be clearly labelled as IFRS information together with an indication of whether it is audited.

Many users said that the Board should not prohibit the inclusion of non-IFRS information in financial statements because this information is useful to their analysis. However, users had some concerns about the risk of entities providing misleading information or clouding IFRS information. Consequently, it is important for an entity to identify, label, explain (including why the non-IFRS information provides a better economic reflection than IFRS information) and reconcile any non-IFRS information presented in the financial statements.

Some users were also concerned about the potential overlap or conflict between the requirements developed by local regulators about non-GAAP measures and those to be developed by the Board.

5. Use of performance measures in the financial statements

Many users believed that this topic should be included in the Primary Financial Statements project. They also said that it is difficult to provide feedback before the Board decides which performance measures (e.g. an EBIT, EBITDA or operating profit subtotal) will be included in the financial statements.

The feedback on this area is generally consistent with that on presenting non-IFRS information in the financial statements (see (4) above). Many users asked the Board to define one or more of EBIT, EBITDA and operating profit to enhance consistency and comparability across entities.

Most users supported the Board developing definitions for unusual or infrequently occurring items. They believed that entities should provide as much disaggregated information about these items as possible and that entities should disclose their policy for distinguishing between frequently and infrequently occurring items.

6. Disclosure of accounting policies

Most users supported the Board developing guidance on which accounting policies an entity should disclose. They found that accounting policy disclosures are useful when they relate to material items or transactions, or provide insight into how an entity has exercised judgement in selecting and applying accounting policies.

Once again, many users thought that materiality judgement is vital in deciding which accounting policies should be disclosed, as well as the level of detail and nature of information that should be provided for that policy.

As to the location of accounting policies, users had mixed views on this issue.

7. Roles of the primary financial statements and the notes, centralised disclosure objectives and the New Zealand Accounting Standards Board (NZASB) approach

Only a few users commented on these sections of the DP and they expressed mixed views on these matters.

8. The role of technology and digital reporting

Although this topic was not discussed in the DP, many users thought that the Board should consider the effects of technology and digital reporting as part of the project because the disclosure problems there are different from paper-based reporting.

Overall project approach and scope – Agenda Paper 11D

Overview of feedback received

Many respondents thought that the DP lacks focus and depth. They agreed that this is an important project but found the DP to consist of a piecemeal collection of different problems with no coherent vision of project direction. Many respondents also found that the DP overlaps with other Disclosure Initiative projects such as the one on primary financial statements, materiality and the Conceptual Framework. This may lead to duplication of guidance, inconsistent or incomplete guidance and it detracts from the ability of stakeholders to understand the big picture of what the Board is trying to achieve.

Many respondents suggested that the Board focus on a few areas that will make the most difference to the disclosure problem. Many respondents felt that a failure to make proper materiality judgements is a key contributor to the disclosure problem. They believe that tackling this root cause would be more effective than trying to fix all the outward manifestations of this core issue.

Similar to users, many respondents suggested that the Board consider issues around digital reporting.

The disclosure problem – Agenda Paper 11E

Overview of feedback received

Most respondents broadly agreed with the disclosure problem as articulated in the DP but different stakeholder groups attributed it to different causes. Preparers attributed it to disclosure overload; users attributed it to the provision of insufficient relevant information (see AP 11B); and other stakeholder groups attributed it to a fundamental behavioural issue of not applying or misapplying materiality judgement. Tight regulatory control also tends to squeeze out any room for judgement.

Be that as it may, all stakeholders believed that the way the Board drafts Standards contributes to the disclosure problem. This came in the form of (1) using prescriptive language, (2) voluminous disclosure requirements, (3) a lack of clear disclosure objectives, and (4) inconsistent or piecemeal drafting of disclosure requirements over time.

Although corrective actions are clearly needed, respondents had widely varying views on what these actions should be, and whether the Board should develop disclosure principles to resolve the problem. The most prevalent view was that this would help but would not be enough in isolation. Those who supported this approach believed that this would provide a common platform for preparers and auditors to debate and document their judgement, which could then be used to deal with regulator questions about missing disclosures. Those who did not support this approach believed that disclosure principles would, by nature, be very high-level guidance that would not make a real difference practically. These principles would merely add to the existing disclosure overload.

Many respondents also suggested that the Board undertake a standards-level review of disclosure requirements. However, they acknowledged that it would be no easy feat and if the Board were to go down this route, they have to plan the project direction and demand on resources properly.

Principles of effective communication – Agenda Paper 11F

Overview of feedback received

Most respondents broadly agreed with the seven principles of effective communication described in the DP and with the Board developing these principles further. However, respondents expressed mixed views as to:

(a) whether these principles should be mandatory or non-mandatory, and the best form for non-mandatory guidance (e.g. illustrative examples, educational materials or a Practice Statement); and

(b) whether the Board should develop non-mandatory guidance on the use of formatting in financial statements.

Their main concern with developing guidance or making them mandatory is that they may stifle innovation.

In addition, many respondents observed that the principles described in the DP are similar to the ones already developed by various regulators. They encouraged the Board to work with these bodies in order to be more efficient when further developing these principles.

Roles of the primary financial statements and the notes – Agenda Paper 11G

Overview of feedback received

Most respondents agreed that the Board should describe the roles of the primary financial statements and the notes. They also agreed with the composition of the primary financial statements and the general contents of the notes. However, some respondents cautioned the Board against any sharp distinction between the two lest this makes the primary financial statements appear superior to the notes.

Many respondents also agreed that the Board should not prescribe the terms ‘present’ and ‘disclose’ as meaning to include information in the primary financial statements and in the notes respectively.

Location of information – Agenda Paper 11H

This deals with the permissibility of including IFRS information outside the financial statements through cross-referencing and including non-IFRS information inside financial statements.

Overview of feedback received

In general, most respondents agreed that both ways should be allowed if circumstances justify their use, but that the Board should set some boundaries in order to prevent abuse. Furthermore, they believed that the Board should do further work and liaise with relevant regulatory bodies before developing any further guidance.

Many respondents thought that the issue of including non-IFRS information in the financial statements should be dealt with as part of the Primary Financial Statements project.

Including IFRS information outside the financial statements

The Board’s preliminary view in the DP was that IFRS information can be included outside the financial statements if:

(a) it is provided within the entity’s annual report;

(b) its location outside the financial statements makes the annual report as a whole more understandable; and

(c) it is clearly identified by means of a cross-reference.

Many respondents took issue with these criteria.

First of all, they were concerned with the use of the term ‘annual report’ because it means different things in different jurisdictions. For example, in Canada and Australia for some entities, an annual report includes documents that are separate from the financial statements which may be published at different times. As such, it will be difficult for this term to be applied consistently in practice. The same goes for describing an annual report as a ‘single reporting package’. These concerns are similar to those raised regarding the use of the term ‘annual reporting package’ in the proposed amendments to IFRS 8 and IAS 34 issued in March 2017.

Secondly, they found the phrase ‘makes the annual report as a whole more understandable’ subjective, which will make it difficult to apply and enforce in practice.

Thirdly, many respondents were concerned with the use of excessive cross-referencing. Their concerns were similar to those noted by the Board in the DP about fragmentation and reduced understandability. If cross-referencing is used, they believed that the Board should require such information to be clearly identified as IFRS information and that it has been audited, if applicable.

Finally, many respondents raised the following issues about incorporating IFRS information outside the financial statements:

potential lack of auditor responsibility over such information;

the need for the Board to co-ordinate with other regulatory bodies to ensure consistent requirements;

ongoing access to and availability of such information; and

the impact of technology and digital reporting.

Including non-IFRS information inside the financial statements

Most respondents, including some regulators, agreed that the Board should not prohibit the inclusion of non-IFRS information inside the financial statements. However, they believed that the Board should clearly define what ‘non-IFRS information’ is.

Non-IFRS information is described as a residual in the DP. The Board did so by distinguishing between different types of information, viz.:

(a) information specifically required by IFRS,

(b) additional information that is necessary to comply with IFRS, and

(c) other information (effectively non-IFRS information).

Many respondents took issue with this distinction and said that it would be difficult to distinguish between (b) and (c). Entities often disclose information falling within (c) because it is relevant to users. This, by default, is captured by the requirement of IAS 1 to provide any additional information that is relevant to users, which in turn makes it a category (b) information. Category (c) also includes information that, in some respondents’ view, should be banned from the financial statements, e.g. information that is inconsistent with IFRS.

With regard to the disclosures around non-IFRS information, most respondents agreed that such information should be clearly identified as non-IFRS and that they are unaudited (if applicable). Some respondents added that the Board should require an explanation of any non-IFRS information and a reconciliation thereof to an IFRS number. They disagreed with the other disclosure requirements suggested by the Board because they viewed them as redundant.

As to the prohibition of including specific types of non-IFRS information in the financial statements, almost all regulators supported it whereas most preparers opposed it. Other stakeholder groups had mixed views. It is a clash between the risk of providing misleading information versus a lack of flexibility and the potential inconsistency with local requirements arising from any form of prohibition.

Use of performance measures in the financial statements – Agenda Paper 11I

Overview of feedback received

Many respondents thought that this topic should be discussed as part of the Primary Financial Statements (PFS) project. Furthermore, some respondents thought that the Board should take a more holistic and principle-based approach to tackling the use of performance measures in financial statements. Some respondents also commented on the Board’s tentative decision to defining EBIT in the PFS project. While many supported the Board’s approach, some disagreed because it is a rule-based measure and it may not be suitable to all entities.

In the DP, the Board suggested that EBITDA can be disclosed only when an entity classifies expenses by nature, whereas EBIT can be disclosed regardless of whether an entity classifies expenses by nature or by function. Most respondents did not explicitly state whether they agreed with this view. However, they believed that the Board should not mandate these requirements because they are rule-based and that the existing requirements of IAS 1 about the fair presentation of additional subtotals is sufficient to help preparers make appropriate decisions.

Many respondents agreed that the Board should develop some guidance on unusual or infrequently occurring items; however, they warned that this would be difficult given the Board’s history of failed attempts and that what is unusual depends on the nature of an entity’s operations. They also asked the Board to clarify how these items differ from extraordinary items which the Board banned back in 2002, and how their separate presentation would interact with the Board’s thinking that ‘the nature or function of a transaction… rather than its frequency, should determine its presentation within the income statement.’ (IAS 1.BC63).

Instead of defining these terms, some respondents thought that the Board could provide generalguidance for the fair presentation and disclosure of unusual or infrequently occurring items. Many respondents also disagreed with prohibiting the use of other terms to describe these items because they would be difficult to enforce from a translation perspective and entities will find ways around it.

As with the Board’s suggestion to describe how performance measures can be fairly presented in financial statements, most respondents agreed with it.

Disclosure of accounting policies – Agenda Paper 11J

Overview of feedback received

Many respondents supported the Board developing guidance about which accounting policies to disclose; however, they were less concerned about where to disclose them. They had concerns about the different categories of accounting policies suggested by the Board – most respondents found them confusing and thought that they will add unnecessary complication to the issue.

Instead, many respondents suggested that the Board develop more principle-based guidance about which accounting policies should be disclose based on their relevance, usefulness and materiality. Educating preparers could also help.

Centralised disclosure objectives – Agenda Paper 11K

Overview of feedback received

Many respondents supported the Board’s view to develop a set of centralised disclosure objectives. However, some respondents said that this would only be effective if these objectives are:

accompanied by a standards-level review of disclosure requirements;

specific, and strike a balance between high-level principles and more prescriptive guidance; and

linked to the concepts of materiality and relevance.

As to the methods proposed by the Board that it could use to develop the centralised disclosure objectives, as well as where to locate these objectives, respondents had mixed views on them.

Overview of feedback received

Respondents provided fewer comments on this section of the DP.

Many respondents supported individual aspects of the NZASB staff’s approach to drafting disclosure requirements, for example, the explicit reference to the use of judgement and the use of less prescriptive language. However, they noted that many aspects will have to be clarified and tested before it can be applied in practice.

Overall, respondents had mixed views on the approach as a whole and had concerns about the Board developing it further. Instead, some thought that the Board should prioritise other activities to help address the disclosure problem.

The IASB will continue its discussion on the Primary Financial Statements (PFS) project. The topics for this meeting are: (1) Clarifying requirements for management performance measures, (2) Management-defined adjusted earnings per share measures, and (3) Presentation of the cash flows of ‘integral’ and ‘non-integral’ associates and joint ventures.

Primary Financial Statements – Cover note – Agenda paper 21

Background

The IASB will continue its discussion on the Primary Financial Statements (PFS) project. The topics for this meeting are as follows:

Presentation of the cash flows of ‘integral’ and ‘non-integral’ associates and joint ventures (AP 21C)

The Staff plan to discuss the following topics at future Board meetings: (a) further development of the proposed structure of the statement of financial performance to cater for more complex scenarios; (b) principles of aggregation and disaggregation, including considering thresholds and the need for additional minimum line items; (c) ways to address the feedback received on the ‘use of performance measures’ section of the Principles of Disclosure DP; and (d) developing illustrative examples/templates for the PFS for a few industries.

Background

In the January 2018 meeting, the Board asked to Staff to clarify what is meant by a ‘key performance measure’ and a measure that is ‘specified or defined in IFRS Standards’. In this paper, the Staff attempt to clarify these concepts.

Staff analysis and recommendation

This is intended to clarify that non-financial measures, as well as measures that relate to an entity’s financial position and cash flows are excluded from the MPM disclosure requirements. The reference to ‘profit or comprehensive income’ is also intended to exclude ratios, growth rates and measures of individual income or expense line items (e.g. adjusted revenue) from the MPM requirements.

As most entities and users focus on profit/loss measures, the Staff believe that limiting MPMs to this subset of key performance measures would capture many non-GAAP measures currently used by entities without introducing excessive disclosure.

‘a measure specified or defined in IFRS Standards’ with ‘subtotal or total that is required in IFRS Standards for the statement(s) of financial performance’.

IAS 1.85A draws a distinction between additional subtotals and those that are required in IFRS Standards. Under the revised wording, the Staff believe that additional subtotals allowed to be presented by IAS 1 would be regarded as an MPM.

Background

In this paper, the Staff present their thoughts on whether an entity should be allowed to disclose a management-defined adjusted earnings per share number (adjusted EPS) in the financial statements.

An adjusted EPS is a basic or diluted EPS figure whose numerator has been adjusted to exclude certain income or expenses. The denominator remains unchanged.

Staff analysis and recommendation

The Staff recommend that the Board:

require all entities to disclose an adjusted EPS that is calculated consistently with an MPM together with supporting disclosures about:

differences between the items excluded from the MPM and those excluded from adjusted EPS; and

the effect of tax and NCI for any adjustments.

The Staff intend to seek feedback from members of the Capital Markets Advisory Committee and the Global Preparers Forum about the cost/benefits of these disclosures.

The Staff regards an adjusted EPS to be calculated consistently with an MPM if the items excluded from these measures are identical. This means that the numerator of the adjusted EPS must:

(a) be an MPM; or

(b) differ from an MPM solely because it is a measure of profit presented at a different level of the statement of financial performance.

There is not much substantive discussion about this topic in the Staff paper.

permit an entity to disclose an adjusted EPS on the face of the statement of financial performance if the MPM to which it relates is also included on the face of the statement. In all other cases, the adjusted EPS should be disclosed in the notes.

This is consistent with the Board’s tentative decision to require disclosure of an MPM on the face of the statement of financial performance if it fits within the structure of the statement.

Prohibit entities from disclosing adjusted EPS measures that are not consistently calculated with an MPM.

Background

In this paper, the Staff consider where cash flows arising from integral and non-integral associates and joint ventures should be presented in the statement of cash flows.

Staff analysis and recommendation

The discussion focuses on dividends received from, cash paid on acquisitions of, and loans made to associates and joint ventures. It does not consider other non-investing types of cash flows arising between an entity and these investees (e.g. sales between these entities).

The Staff considered whether the cash flows described above should be classified as operating activities or in another category between the operating and investing categories. They rejected these alternatives because they would either contradict the proposed revised definition of investment activities (which includes dividends and interests received from associates and joint ventures irrespective of whether they are integral to the entity) or make the statement of cash flows more confusing.

Consequently, the Staff believe that all such cash flows should be included in the investing category but that a distinction be made between those arising from integral and non-integral associates and joint ventures.

The Board will continue to discuss the development of an accounting model for dynamic risk management (DRM). The Staff will discuss the asset profile in this session.

Dynamic Risk Management – Cover note - Agenda paper 4

The Board will continue to discuss the development of an accounting model for dynamic risk management (DRM). The Staff will discuss the asset profile in this session (AP 4B).

AP 4A contains the project background and a summary of the Board’s discussions to date.

Recap

The aim of the proposed DRM model is for financial statements to represent faithfully the impact of dynamic risk management activities undertaken by an entity. It aims to help users assess management’s performance by focusing on how well management was able to align the asset profile with the target profile using derivatives. Each of the elements that contributes to performance assessment, viz. (1) the asset profile, (2) the target profile and (3) the derivatives will be analysed by the Staff before they move onto performance assessment. This constitutes the first phase of the project. In the second phase, the Board will consider other peripheral issues relating to DRM.

The Board has tentatively decided that the DRM model should be developed based on the mechanics of cash flow hedge accounting.

Asset profile – Agenda Paper 4B

Background

The asset profile defines (in other words, it sets the parameters of) which items are managed for interest rate risk and are therefore subject to performance assessment under the DRM model.

In this paper, the Staff set out the qualifying criteria for designating an item into the asset profile. They also discuss some technicalities about designation and situations requiring de-designation, as well as documentation requirements.

Staff analysis and recommendation

Qualifying criteria for items to be included in the asset profile

The Staff recommend that an item must meet all six criteria below in order to qualify for inclusion in the asset profile.

(i) Financial assets must be measured at amortised cost

DRM is about managing interest income and expense. As interest income is calculated by applying the effective interest method to financial assets, the Staff believe that the asset profile should comprise financial assets that are measured at amortised cost. These assets also make up the bulk of the population that is subject to DRM activities. The Staff will consider financial assets measured at FVTOCI in the second phase of the project.

(ii) The effect of credit risk does not dominate the changes in expected future cash flows

In some situations, the effect of credit risk can be of such a magnitude that it dominates the changes in the financial asset’s expected cash flows. In such cases, although there is an economic relationship between a derivative and the financial asset, the level of alignment with the target profile might become erratic due to the effect of credit risk. Consequently, the Staff believe that these items should not qualify for inclusion in the asset profile.

(iii) Future transactions must be highly probable

In practice, in addition to exposures already recognised in the statement of financial position, entities often manage exposures associated with future transactions that are expected to affect future interest income and expense, e.g. expected growth of a portfolio or reinvestment of proceeds from maturing financial assets.

The Staff believe that these future transactions should qualify for designation within the asset profile in order for the financial statements to represent faithfully an entity’s DRM activities. Consistent with IFRS 9’s guidance on qualifying hedged items, the Staff believe that only firm commitments and highly probable forecast transactions should qualify for designation because there is sufficient certainty regarding the timing and amount of cash flows from these transactions. Allowing other expected but not highly probable transactions for designation might negatively influence the alignment of the asset profile to the target profile which in turn affects management’s performance. This is because management’s ability to predict the occurrence, timing and amount of such transactions is more limited.

(iv) Future transactions must result in financial assets that are measured at amortised cost

This is for the same reason as explained in (i) above.

(v) Items already designated in a hedge accounting relationship are not eligible under the DRM accounting model

Designation of such items under the DRM model would result in deferring gains or losses in OCI. As these items are already subject to hedge accounting, this could result in double counting.

(vi) Items within the asset profile must be managed on a portfolio basis for interest rate risk management purpose

See point (2) below.

Designation of items on a portfolio basis

The Staff considered whether items should be designated as part of the asset profile on an individual basis or on a portfolio basis.

The staff recommend that items be designated on a portfolio basis as this will simplify the designation process. This is because financial assets and future transactions that meet the asset profile qualifying criteria are allocated to a designated portfolio and will be considered as part of the asset profile without the need for frequent designation and de-designation on an individual basis. This is consistent with one of the goals of the DRM model which is to reduce operational complexities associated with the application of the current hedge accounting guidance to dynamic portfolios.

Furthermore, this approach would align the designation mechanics with the way management considers interest rate risk. This is critical to achieving the objective of the DRM model.

Each portfolio should consist of assets that share similar risk characteristics. For example, financial assets with prepayment features should be separated from those without such features and assets denominated in different currencies should be allocated to different portfolios.

Interaction between designation and the dynamic nature of portfolios

Portfolios are constantly changing as new assets are added and existing assets mature. As such, an entity’s risk management objectives do not focus solely on existing assets, but also on what will happen to interest income when new assets are originated and when assets mature and the proceeds are reinvested.

Whether or not future transactions arising from reinvestment can be designated as part of the asset profile (assuming they meet the qualifying criteria) depends in part on the time horizon set by the entity in its risk management objective.

For example, assume an entity’s target is to reprice after five years. It has a portfolio of loans that will mature in five years which will be reinvested at that time. Since reinvestment will take place at a time that is consistent with the entity’s risk management objective, these reinvestments would not form part of the designated portfolios because they will affect interest income in a time horizon that is beyond the timeframe of the entity’s risk management objective.

In contrast, assume another entity has a target repricing date in ten years’ time. It has a portfolio of loans that will mature in five years which will be reinvested at that time. In this case, the future transactions arising from the reinvestment may be designated as part of the asset profile (if they meet the qualifying criteria) because they will occur before management’s target repricing date and thus will affect interest income within the time horizon set by the entity’s risk management objective.

In light of the above, the Staff recommend that an entity be allowed a choice to designate future transactions (i.e. growth and reinvestments) to be part of the asset profile but only at initial designation, provided designation is consistent with the entity’s risk management strategy.

In addition, the Staff are of the view that changes to a portfolio resulting from updates to the asset profile are not a designation or a de-designation event but instead a continuation of the existing relationship. This is consistent with the rebalancing concept in IFRS 9 where the hedge ratio is updated in order to comply with hedge effectiveness requirements.

Designation of a percentage of a portfolio

The Staff recommend that the DRM model allows for designation of a percentage of a portfolio, provided that:

(a) The designated percentage is consistently applied to all expected cash flows within the portfolio;

(b) The same percentage is applied to a related portfolio of future transactions; and

(c) Designation of a percentage of a portfolio is consistent with an entity’s risk management strategy.

The Staff believe that there are valid reasons when an entity would manage only a portion of a portfolio for interest rate risks. The requirement to apply the same percentage to all future cash flows from the portfolio is consistent with managing these risks on a collective basis. An exception is made for future transactions arising from growth. See 5 below.

Growth of the asset portfolio

Growth of an asset portfolio means an increase in the notional amount of the portfolio. For this to happen, an entity would require additional funding (i.e. to incur additional liabilities). Because both the asset and liability will be priced at future market rates, the entity is not exposed to interest rate risk. However, if the funding is expected to come in the form of zero-rate deposits, a mismatch in re-pricing does exist and entities may actively manage this risk.

Given that growth of a portfolio is different from reinvestments, the Staff recommend that an entity be permitted to designate a percentage for future transactions related to growth that is different from the percentage designated for the associated portfolio of financial assets (i.e. existing ones or to arise from reinvestments), provided this is consistent with the entity’s risk management policies. The Staff further think that allocating growth and other future transactions into separate portfolios may assist with tracking and performance assessment.

De-designation of a portfolio

The Staff recommend that items be de-designated from the asset profile when one of the following occurs:

(a) Financial assets are derecognised;

(b) The effect of credit risk dominates the changes in expected future cash flows; or

(c) Future transactions are no longer highly probable.

The last two points are consistent with the qualifying criteria discussed above.

In addition, the Staff recommend that the Board prohibit voluntary de-designation for the same reasons given in IFRS 9 for prohibiting voluntary discontinuation of a hedging relationship.

Documentation requirements

The Staff also list several documentation requirements about designating items within the asset profile.

Next steps

The Staff plan to discuss the target profile at the next Board meeting.

The Board will continue its discussions on the business combinations under common control (BCUCC) project. In this session, the Staff will discuss the starting point in developing proposals.

Business Combination under Common Control – Cover note – Agenda paper 23

The Board will continue its discussions on the business combinations under common control (BCUCC) project. In its December 2017 meeting, the Board tentatively decided on the scope of the project. In this session, the Staff will present the following paper:

Starting point in developing proposals (AP 23A)

Next steps

The Staff expect to issue a discussion paper as the next consultative document.

Starting point in developing proposals – Agenda Paper 23A

Background

In this paper, the Staff consider what the best starting point is for developing proposals for BCUCC transactions.

In December 2017, the Staff held discussions with the Accounting Standards Advisory Forum and the Emerging Economies Group on this topic. Neither group expressed a clear preference regarding the starting point for the model.

Staff analysis

The Staff consider three alternatives:

(a) starting from scratch;

(b) starting from existing Standards, i.e. using the acquisition method in IFRS 3; or

(c) starting from existing practice, i.e. using a variation of the predecessor approach.

The Staff observe that these alternatives overlap to some extent and the proposals developed under each could be very similar.

On balance, the Staff prefer starting with the acquisition method in IFRS 3. This is because the acquisition method has withstood the test of time – it may have its faults but its concepts are well understood and it is already being applied to some BCUCC transactions. In contrast to the predecessor approach, it will provide a clear starting point for the Board to develop the model further.

The Staff emphasise that using the acquisition method as the starting point does not mean that all BCUCC transactions will be accounted for under this method. The overriding objective in developing the model is to provide useful information to users that is cost-beneficial. As such, the acquisition method will only be applied if it will provide useful information about a particular BCUCC transaction. If not, the Board will have to consider other approaches to account for these transactions in order to provide useful information at a cost that justifies the benefits.

The Staff do not recommend starting with the predecessor approach. Although it is the most prevalent approach in practice, there is significant diversity in how it is applied, including how the acquired assets and liabilities should be measured and whether comparative figures should be restated. The Board will have to spend a considerable amount of time just to agree on a clear starting point for this method.

Staff recommendation

The Staff recommend that the Board use the acquisition method in IFRS 3 as the starting point in developing proposals for transactions within the scope of the BCUCC project.

Next steps

The Staff will discuss the following topics in future Board meetings:

(a) how to identify transactions within the scope of the project for which the acquisition method would provide useful information, and

(b) how to account for transactions within the scope of the project for which the acquisition method would not provide useful information that is cost-beneficial. The Board could either start from scratch or consider a variation of the predecessor method for these transactions.

Next steps

The next TRG meeting will be held on 2 May. Two more have been scheduled for the second half of 2018 and additional meetings may be held in the first half of 2019. The Staff expect that some amendments will come through the annual improvements process. They also aim to publish further webcasts and articles to support implementation.

Background

The first TRG meeting for IFRS 17 was held on 6 February 2018. This paper provides an overview of the TRG’s discussions at that meeting. The TRG discussed the following topics.

Separation of insurance components of a single insurance contract

The question relates to whether a single insurance contract could be separated into different insurance components for measurement purposes. Similarly, the submitter asked whether a reinsurance contract held should be separated into components to reflect the underlying contracts covered.

TRG members observed that the lowest unit of account in IFRS 17 is the contract that includes all insurance components. Generally, the legal form of a single contract reflects its substance. This is so even if the contract covers different risks. Overriding the ‘single contract’ unit of account presumption involves significant judgement and is not an accounting policy choice.

Boundary of contracts with annual repricing mechanisms

The submitter asked whether insurance contracts with annual repricing mechanisms would have a contract boundary of one year or longer than one year in terms of IFRS 17.34(b). The question centres on whether the entity has a substantive obligation to provide services beyond the first year.

TRG members noted that the fact patterns submitted are very specific and are not common in practice. They reiterated that all relevant facts and circumstances must be considered in this assessment.

Boundary of reinsurance contracts held

The submitter asked how the requirements of IFRS 17.34 regarding the boundary of an insurance contract should be applied to reinsurance contracts held.

IFRS 17.34 provides guidance on determining when a substantive obligation to provide services ends from the insurer’s perspective. On the flip side of the coin, in terms of a reinsurance contract held, a substantive right to receive services from the reinsurer ends when the reinsurer has the practical ability to reassess the risks transferred thereto and can set a price or level of benefits for the contract to reflect fully the reassessed risk, or the reinsurer has a substantive right to terminate the coverage.

Accordingly, the boundary of a reinsurance contract held could include contracts that are expected to be issued in the future. This is a change from existing practice.

Insurance acquisition cash flows paid and future renewals

The question relates to how non-refundable acquisition costs should be accounted for when an entity underwrites a new contract with the expectation that the contract will be renewed.

TRG members observed that IFRS 17 requires acquisition costs paid or received that are directly attributable to future contracts to be recognised as an asset or liability before the group to which those future contracts belong is recognised. These acquisition costs include amounts that were paid or received before those contracts are issued.

Determining the quantity of benefits for identifying coverage units

This submission considers how the coverage units of a group of insurance contracts with no investment component should be determined. Coverage units establish the amount of the contractual service margin (CSM) to be recognised in profit or loss for services provided in a period.

TRG members did not reach a view because they wanted to assess this issue together with coverage units for insurance contracts with investment components. The TRG will reconsider these two topics at the next meeting.

Insurance acquisition cash flows when using fair value transition

The submitter asked whether, in terms of the fair value transition approach to IFRS 17, acquisition cash flows that occurred prior to the transition date are recognised as revenue and expenses for reporting periods subsequent to the transition date.

TRG members noted that the fair value approach is intended to be a fresh start approach. This means that only acquisition cash flows arising after the transition date are included in the measurement of the CSM. Since acquisition cash flows that occurred prior to the transition date are not included in the CSM at transition date, they will not be included in revenue and expenses for reporting periods subsequent to the transition date.

Several other questions were submitted in addition to these six issues. TRG members observed in particular that the application of IFRS 17 will result in a significant change from existing practice in the following areas:

(a) presentation of assets and liabilities on the statement of financial position;

(b) premiums received applying the premium allocation approach; and

(c) treatment of contracts acquired in their settlement period.

The Staff will conduct outreach to understand these issues in more detail. They will update the Board with the results of their outreach.

Update on investor activities on IFRS 17 – Agenda Paper 2B

Background

This paper provides a high-level overview of investors’ reactions to IFRS 17, which were gathered from outreach activates conducted by the Staff since the publication of the Standard.

Investors generally welcomed the Standard. They think it will improve transparency of the source of profits for long-term insurance contracts and that it should enhance consistency and comparability between entities for both life and non-life businesses. This is particularly relevant in the following areas:

information about contractual service margins;

risk adjustments for non-financial risks; and

information about future profitability of new insurance contracts.

Virtually all European investors felt that the similarities between IFRS 17 and Solvency II made the measurement requirements of IFRS 17 easier to understand.

On the other hand, investors were mostly concerned with the entity-specific judgements required and accounting options allowed by IFRS 17.

Given its nature, accounting for insurance contracts is heavily reliant on assumptions. Some of the key factors for measuring insurance contracts may be subject to significant judgement, particularly in the areas of discount rates, risk adjustments and the initial contractual service margin. Investors emphasised that it is essential for entities to describe clearly the process for estimating discount rates and risk adjustments in order for them to understand the amounts recognised in the financial statements and the changes in those amounts.

Furthermore, investors thought that the options for presenting the effects of changes in financial assumptions (either in profit or loss or between profit or loss and OCI) may reduce comparability between entities and add complexity when analysing such information. Once again, they emphasised the importance of proper disclosure in relation to these amounts.

This paper considers the different purposes of Discussion Papers (DP) and Exposure Drafts (ED). This session is held in anticipation of the Board’s decisions about whether it should publish a DP or an ED for the projects on primary financial statements, goodwill and impairment as well as rate-regulated activities.

Discussion Papers and Exposure Drafts – Agenda paper 28

This paper considers the different purposes of Discussion Papers (DP) and Exposure Drafts (ED). This session is held in anticipation of the Board’s decisions about whether it should publish a DP or an ED for the projects on primary financial statements, goodwill and impairment as well as rate-regulated activities.

This is an education session and the Board will not be asked to make any decisions.

Background

The Board is not required to publish a DP before adding a standard-setting project to its agenda. Although a DP is generally issued before the start of a major standard-setting project, the Board might conclude that a DP is not necessary because it has sufficient input to proceed directly to an ED.

A DP is a high-level document setting out a comprehensive overview of the issue, possible approaches to addressing the issue and the Board’s preliminary views. On the other hand, an ED sets out details of the proposed amendments including a basis for conclusions and any dissenting views to the proposals.

The following factors should be considered when determining whether a DP or an ED should be issued:

The stage of development

At the idea generation phase of a project (e.g. a research project), the Board is still defining the problem and scope of the project and considering the possible approaches to address the issue. A DP is generally more appropriate as it conveys ideas and seeks feedback on the possible approaches.

At the implementation phase of a project (e.g. a standard-setting project), the Board will have selected an approach, and is setting out its view of what the accounting requirements should be. Issuing an ED at this stage will seek feedback on specific proposed requirements. Ideally, the proposed requirements should be complete enough for the Board to issue a final Standard based on the ED.

The significance of the change

A DP is useful to ensure that the full range of views is captured, considered and acknowledged, leading to a common understanding of the foundation for future proposals. It is particularly useful when there is a range of answers or several interrelated issues to explore.

In contrast, when the Board has already determined the approach it intends to pursue, and when that approach is generally understood and accepted by interested parties, an ED may be appropriate.

The effect on timelines and stakeholder participation

Although a DP and an ED both have a minimum comment period of 120 days, stakeholders tend to take an ED more seriously than a DP.

The risk of re-exposure

Issuing an ED prematurely increases the risk of re-exposure. This can happen when substantial issues emerge from feedback received on the ED which the Board has not previously considered.

Furthermore, the Board’s ability to respond to feedback can be more limited for an ED compared to a DP. This is because an ED sets out the details of the Board’s preferred approach and the development of those details are constrained within the context of that approach. It would be difficult for the Board to modify the proposals fundamentally after the first exposure. Any subsequent feedback may also not reflect a balanced view because stakeholders lose interest in the protracted process.

In this paper, the Staff discuss what the most appropriate unit of account is to account for the rights and obligations arising from the rate adjustment mechanism. They also revisit whether such a right and obligation meet the revised definitions of an asset and a liability respectively under the forthcoming revised Conceptual Framework.

Background

In this paper, the Staff discuss what the most appropriate unit of account is to account for the rights and obligations arising from the rate adjustment mechanism. They also revisit whether such a right and obligation meet the revised definitions of an asset and a liability respectively under the forthcoming revised Conceptual Framework.

Staff analysis and recommendation

Unit of account

The Staff recommend that the model identifies the unit of account as the individual timing differences (as opposed to the net of all timing differences) arising from the regulatory agreement for the following reasons:

although there is some interdependency between all the timing differences and the overall rate chargeable to customers over time, the individual timing differences are assessed separately by the entity and the regulator and the effect of each timing difference on future rate calculations and cash flows can be identified;

individual timing differences and their subsequent effects on cash flows expire in different patterns; and

the right to charge higher amounts in the future for services already performed have sometimes been factored and used as security for borrowings, separately from other factoring or borrowing transactions.

Consequently, using the individual timing differences as the unit of account will provide users with useful information about the expected pattern of reversal of timing differences and the timing of when they will affect the entity’s future cash flows.

This assessment is consistent with the Staff’s analysis to date although they have not explicitly referred to the unit of account concept in previous papers.

Asset and liability definitions

The Staff believe that the regulatory right meets the definition of an asset because:

it is a present economic resource: the entity has an existing ability to charge a higher amount in the future arising from the rate adjustment mechanism which will lead to economic benefits. This right is stipulated in the regulatory agreement.

controlled by the entity: only the entity can charge the higher rate and thus obtain benefits from it.

as a result of past events: the entity has already carried out the related services.

Similarly, the regulatory obligation meets the definition of a liability because:

it is a present obligation of the entity: the entity has an existing duty to charge a lower rate in the future due to the operation of the rate adjustment mechanism. The entity has no practical ability to avoid charging a lower rate because it is specified in the regulatory agreement.

to transfer an economic resource: the entity is obliged to charge a lower rate in the future.

as a result of past events: the entity has already received economic benefits for performance not yet fulfilled.

Next steps

In the next meeting, the Staff will ask the Board to decide on:

proposals about the scope and recognition aspects of the model; and

whether the next consultative document should be a discussion paper or an exposure draft.

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